By Mark Gongloff

Markit

Bank of America’s CDS spread. Click for gigante image.

Stocks are bouncing this morning, like they do, because Chinese economic data were not soul-meltingly awful and because stocks have sold off so hard for so long. But the credit market is still moving in the other direction.

In the credit-default swap market, spreads are wider across the board, meaning people are paying up for protection. The Markit investment-grade corporate debt index is 3 basis points wider. The index of European sovereign debt is 10 basis points wider. The index of European financials is also 10 basis points wider.

Bank of America’s five-year CDS spread, meanwhile, is pushing toward 390 basis points, a record high. In other words, higher than the levels it hit during the financial crisis. At last check, the five-year spread was up 8% to 388 bp. The one-year spread is even higher, up 8% to 424 bp, meaning the CDS curve is inverted, usually a sign of trouble.

Peter Tchir at TF Market Advisors is baffled that stocks are trying to push higher even as credit gets worse:

It is not only the CDS market that is struggling. The cash bond market is at a virtual standstill. Bids for bonds have dropped and so far, sellers haven’t yet given up hope and hit the much lowered bids, but it doesn’t feel like it would take much for that to happen as the market is teetering.

It is interesting how many investors talk about credit leading the markets, but choose to ignore it when they see it.

At least Bank of America stock investors are getting the message from the CDS market — its stock price is now down to $6.33, lower than its close of $6.42 yesterday. A key mark for the stock, now that $6.50 has been breached, is $6.31. Keep an eye on this today.

“In the very near term, we’re watching what the credit bears are doing, as we don’t feel any bounce in stocks is convincing as long as the bears are upping the pressure,” writes Brian Reynolds, chief market strategist at WJB Macro Strategy.

Update: BofA 5-year CDS spread is now 17% wider at 419 bp. That’s more than its crisis-era close.

Comments (3 of 3)

This seems like 2008 all over again. Short B of A and push CDS spread up for the benefit of the hedge funds. Until the regulators stop allowing people play the CDS system, ie hedge funds, this bogus trading will continue. Thanks for allowing an easy enty into B of A....I will smile all the way back up!!!

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